A Multibagger's Success Story! Heavy Electricals Behemoth BHEL Set For Next Cycle Of Growth, Suggested To Buy

Heavy electrical equipment maker, BHEL also a popular defence stock, is well poised for the next cycle of growth, a situation seen during the first decade of 2000, as per brokerage JM Financial. The brokerage believes the heavy electricals behemoth to live on, with the opening up of 60GW of opportunities amidst limited competition. Accordingly, JM has suggested buying on BHEL share price for a target price of Rs 225, which implies about 15% of the current market price.

As per JM's note, the concurrent emergence of non-thermal power opportunities (pumped-hydro, nuclear, spares) and gradual scaling up of the industry business kill the commonly held view of the zero-terminal value of the thermal business and its implications for the company. {image- stocks6001-1704556617.jpg www.goodreturns.in}

In JM's view, the demand for power in India continues to grow (7MFY24: energy/peak, 8.5%/12.7%) - significantly higher than all earlier growth rates (FY05-15/FY15-20: energy/peak, (6.1%/5.4%)/(3.9%/4.4%)). Amidst this, supplies remain constrained, leading to a rebalancing of energy strategy between energy security and sustainability.

At present, 27GW of thermal power projects are under construction, 12GW have been bid out, 19GW are under clearances and another 30GW are at the planning stage with a target of adding 88GW by FY32.

Earlier, in addition to BHEL, other manufacturers had a combined capacity of 9-11GW. However, JM pointed out that in the recent bids ( 2x800 MW NTPC Singrauli-III, 3x800 MW NLC Talabira STPS, 1x800 MW DBCR TPP Ext, Yamunanagar, Haryana), BHEL is the only bidder as per the industry sources.

JM believes that India will need to add 6-7GW of capacities every year for a net addition of 87,910MW of power generation capacity by FY32. BHEL commissioned a maximum of 12,215 MW of thermal power projects in FY16.

Currently, BHEL has between Rs 70-80 billion of fixed expenses, constituting the cost of manpower, part of miscellaneous expenses and others. The brokerage said, "With increasing execution rate, we believe that the high operating leverage and limited competition will improve EBIT margin in the power business from FY25 onwards - from 8% in FY23 to 18%/ 21% in FY26/ FY29 -as it did in the earlier cycle (22%/ 25%/ 24% in FY06/ FY08/ FY10)."

By 2030, 50GW of thermal capacities will exceed their design life requiring retirement/ replacement/ major R&M. Further, scalable opportunities in non-thermal power - pumped-hydro power (akin to hydropower, where BHEL has around 45% market share); nuclear power (48% market share; likely to play an active role in Small & Modular Reactor technology) and spares & services (to grow at least 2x by FY30) - are likely to significantly compensate gradual tapering of thermal opportunities, it said.

"With the commissioning of 20GW of under-construction projects in the next 12-18 months, we believe stress on receivables will ease Mar'25 onwards. The decrease in debtor days along with better payment terms (minimum 10% advance) will translate into 44% CAGR in the cash balance during FY23-26 vs. -10% CAGR during the preceding 5 years," the brokerage's note added.

On the valuation, JM's note said, "Changing our valuation methodology to SOTP-based considering the tapering of thermal business beyond 2030 and industry business - following growth in the non-power business - we expect the company to deliver Revenue/EBITDA/PAT CAGR of 35%/127%/145% over FY23-26E supported by healthy ordering, improving execution and the benefit of operating leverage. We maintain a BUY rating on the stock with a SOTP-based TP of Rs 225, indicating a potential upside of 15% from current levels."

On BSE, BHEL's share price ended at Rs 195.80 apiece, up by 0.4% with an m-cap of Rs 68,178.80 crore. In a year, BHEL shares have emerged as multibagger with gains of 140.54% on the exchange.